Carvana: An Introduction to the Car-Buying Service That's Disrupting the Auto Sales Industry

Carvana (CVNA 0.29%) has emphatically grabbed investors' attention this year. Despite a sharp downturn this fall, the used-car retailer's stock has still gained 132% year to date.

In the following segment from Industry Focus: Consumer Goods, host Vincent Shen and Fool.com contributor Asit Sharma provide investors with an overview of the young company, which debuted on the public markets in April 2017. Learn why acquiring a used vehicle from Carvana differs so greatly from the traditional car-buying experience, and how that's fueling the organization's triple-digit revenue growth.

A full transcript follows the video.

This video was recorded on Nov. 20, 2018.

Asit Sharma: Brief overview if you're not familiar with Carvana, this company allows you to complete an entire car buying experience online. This is amazing to me, being somewhat middle-aged, as I often joke about. I have a young friend who I've mentioned on this show before, his name is Brandon Stokes. He's a millennial investor. I learn about these forward-looking companies from him. I first heard about Carvana from Brandon, who had just bought a used car through this service. It's very difficult for someone with my experience of car buying, used to going in and haggling with the salespeople, and then having to go sit at the desk and work out if their financing is better than what my bank has, to think that you can search for a car online using Carvana's technology -- they have a patented 360-degree photo virtual tour of each vehicle. You can look at the car report online, see any spec that you want. Then, you can have financing offers presented to you very quickly online from Carvana. You can finance the used vehicle through them. You can see your contracts within minutes online and sign them, if you want, electronically. Your car can be delivered. Or, if you live in a city in which Carvana has its patented car carousel, you can go for this show, which is quite incredible, it's a car vending machine. We have one in Raleigh, so I drove out there to look at it. Really elegant, transparent building. The car that you've ordered will come out of the car vending machine and you can drive it home.

That's the service in a nutshell. It removes all of the human interaction, except for the touches that you want. You can call up Carvana and get sales assistance. People are very friendly when you go to the dealership to pick up your vehicle. But you can see how this appeals to the millennial mindset. We've talked about so much on this show how millennials, the younger generation, loves to conduct business through an app. It's not that they don't want to interact with other human beings, [laughs] but they appreciate the convenience of being able to do everything in a transaction online. This is a service geared toward a younger generation, which is only going to have more purchasing power as time goes on.

Vincent Shen: I'll say that I drove by one of these Carvana Vending towers for the first time, actually, just a few weeks ago. There's a location near D.C., in this area. It's really cool-looking. I didn't realize -- again, not having followed the company at that time -- that these were popping up. I think there's 14 of them currently in the U.S. It looks really cool. I looked up some videos on YouTube of what the pickup process is like if you buy a car and you go to one of these Vending towers. They give you this big coin, you drop it in a slot, and then the car comes down kind of like a conveyor belt. Very cool. Worth checking out on YouTube, get a sense of what that experience is like. I think it's great for building the brand and offering something very unique and fun for car buyers in what is historically a stressful experience, when you're going to a used car lot and doing it that way.

Based on some of the recent acquisitions that the company has made, the key opportunities that management tends to bring up for Carvana, their singular focus here, as you've alluded to, is to streamline the used car buying experience so it's not something people dread. The used car salesman trope is still something people joke about for a reason. With Carvana, you can do all this shopping from your couch. You look through an inventory of over 11,000 vehicles. There's that 360-degree virtual tour of the interior and exterior that you mentioned. They even highlight any defects on the car in that. Once you've made your choice, you can complete the checkout process in as little as ten minutes. Carvana can handle the financing for your used car. They do that for the majority of their buyers. The car can be delivered as soon as the next day, and every car comes with a seven-day money-back guarantee, so you can return it for any reason for a full refund. I've only gone through the car buying process twice so far in my life, but that sounds like a pretty sweet deal, frankly, compared to what it used to be like.

On the flip side of that, I'd like to pivot now to talk about a little bit of the supply chain for Carvana, and how this business model proves out in the financials. The company acquires its inventory from its own customers, from auctions, and from rental companies with these big fleets. In the process, they screen, they analyze these potential units to determine the right pricing, how they fit into their existing inventory. The company mentions that every car they source from an auction to sell to retail customers is purchased sight unseen. This is an example of the company's very strong processes and data at its disposal to make smart purchasing decisions for its inventory supply. For each vehicle, CEO Ernie Garcia said Carvana will put about $1,000 of parts and labor into the car at its inspection and reconditioning centers before capturing photographs, and then the imagery that it uses to list the vehicle on its website. Once a car is sold, we mentioned how it can be delivered directly to you, you can go to the Vending towers, there's some optionality there.

Everything that I've described so far, that's for the retail side of the business, which makes up the lion's share of Carvana's top line. Something to keep in mind is, the company will also sell vehicles via wholesale channel at lower profit margins. Overall, if you've been thinking about how all of this pieces together in terms of the buying experience, in terms of how Carvana operates on its own, you'll notice that from this description, Carvana is a good example of vertical integration. Every step from procurement to fulfillment happens within its own ecosystem. As a result, something that company also mentions is, they gather a lot of data, and they use that to inform how they approach new markets, how they design the online shopping platform experience, and a lot more.